Next Investment Steps - Maxed trad 401k and roth, roth 401k available

[howlongisnow]

Currently maxing out 401k for myself and Roth IRA for myself and my wife (stay-at-home mom). Work is now offering a Roth 401k post-tax contribution option, with no in-service distributions.

I know it's not always popular around here, but we're overpaying our mortgage significantly and are on track to have it paid off in the next 2 years. I have a well paying software job, working remotely in the midwest while making coastal wages. I don't want to assume that this will always be the case, and the peace of mind of paying off the house is worth it.

That said, I'm considering taking some of the mortgage overpayment and putting it in to the Roth 401k. Aside from the general "pay the minimum on the mortgage" arguments, is there anything in particular I should know or consider about making Roth 401k contributions, especially without in-service distributions?

[dandarc]

Big thing - you get a single $18,000 employee deferral that you can split between the traditional and Roth 401Ks.

So it is less "taking money from the mortgage" to fund the Roth 401K and more "taking money from the traditional 401K".

In-service distributions do not really matter for a Roth 401K - you just would make your standard traditional vs. Roth decision.  I think you've been reading up on the Mega-Backdoor Roth IRA technique, which involves after-tax contributions to a traditional 401K.  These are not the same thing as Roth contributions.  Without the in-service distributions, the Mega-Backdoor Roth IRA technique isn't as compelling of a thing.

[howlongisnow]

Ah ha, that makes sense. It's what I suspected might be the case, but I wasn't sure. Thanks.

In that case, I suppose I need to figure out if it's better for me to contribute to the roth or traditional 401k. If I understand right the proceeds of the pre-tax contributions will be taxed as regular income when I withdraw it, while the roth will be taxed as capital gains?

[dandarc]

Traditional = No income tax now, pay ordinary income tax when you withdraw.

Roth = Pay ordinary income tax now, no income tax when you withdraw.

Generally, if you think your marginal tax rate will be higher in retirement than it is today, you'd go Roth.  If you think your marginal tax rate will be lower in retirement than it is today, you'd go traditional.  Sounds like you're fairly high income today, so at first glance, it seems traditional is probably the better decision, but I don't know all of your information / plans.

[howlongisnow]

Thanks - this is super helpful.

[RWD]

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

[howlongisnow]

Thanks - I have been following the investment order, but had been unsure if I was eligible for some of the things (like HSA and mega backdoor roth).

[MDM]

Thanks - I have been following the investment order, but had been unsure if I was eligible for some of the things (like HSA and mega backdoor roth).

See links in the investment order post about the traditional vs. Roth choice.  You could take a look at your situation, then come back here and post "I think we should use ________ because our current marginal rate is ________ and we expect it will be ________ after we retire in the _______ years until starting SS benefits."  You'll likely get feedback. :)

See 2016 Publication 969 - p969.pdf regarding the type of medical insurance (HDHP) that allows you to have an HSA.

See your 410k "Summary Plan Description" (or call your benefits department, although you may or may not get good answers there) regarding the mega back door Roth.